01 October 2007 Features

 

Corporate body politics

Fabien Buliard

Banks are faced with a future in which the customers increasingly call the shots.

The recent surge in corporate demand for identity authentication services, described in our feature about the rebirth of Identrust, reflects the simple fact that no matter how forward thinking an industry initiative may be, it won’t go anywhere until the client base is ready for it.

Ultimately, in the absence of true regulatory constraint, the adoption of any new concept is in the hands of customers. Increasingly, however, the initiative itself is slightly shifting from the banking community to the corporate world, especially when it comes to shaping new payment systems.

Often less conservative than banks in their approach, corporate clients are driving innovation, taking the bull by the horns and telling banks how they want to be served. More specifically, with the development of payment factories and wider network access, they are increasingly taking control over transactional functions.

The Merck treasury overhaul, discussed in the above-mentioned feature, is going well beyond the security and identity management aspects. The pharmaceutical giant is reducing the number of banks it uses globally to a handful, and it is undertaking a centralisation effort of its systems, looking at using a single instance of its ERP and treasury package across the group.

More importantly, the company decided to streamline its payment procedures and negotiate with its remaining banking partners the use of a single, generic payment file format worldwide, irrespective of the payment instrument, currency or country. It will then be up to the banks to figure out how to process the transaction and which clearing system to use.

Such an arrangement potentially means that the company will not need to worry about migrating to SEPA standards, which will become the bank’s problem. The corporate produces one type of file, sends it to one destination within the bank, which then needs to rearrange the fields to comply with local formats and route the transaction to the appropriate venue.

“The model was first brought up in September 2006 and we have since been working with Citibank and HSBC to make sure the same format can be accepted by both banks,” says Hans-Maarten Van Den Nouland, Merck’s London-based director of international treasury services. “We will launch the first phase on 1 October, with the testing of a generic payment format with Citibank. The digital identity system will probably be tested in Q4.”

However, essentially forcing financial institutions to comply with corporate requirements is a luxury only the largest multinationals can afford. I, for one, certainly wish I had that kind of leverage with my bank and, like me, most businesses will keep on working on their banks’ terms for quite a few years to come.

In a December report entitled Crossing Frontiers in Business-to-Business Electronic Payments, Celent analyst Alenka Grealish points out that “on the technological front, the companies that are most likely to venture into e-payments are those embarking on broader projects, which could encompass an e-payment component or a new corporate-to-bank connectivity infrastructure.”

She goes on to say that SEPA will promote ISO20022 adoption, leading to more corporate-to-bank connections. Potentially, that could also mean that more corporates will look to replicate Merck’s approach, which Van Den Nouland says has generated a lot of interest from other companies.

However, only a limited group of tech-savvy international banks will be able to cater for the needs of sophisticated global players wishing to standardise on a handful of worldwide relationships. And while companies like Merck are clearly pioneers, more are likely to follow.

Going forward, as an increasing number of large corporates streamline their systems and develop sophisticated in-house banks, smaller local institutions are likely to lose out and will probably need to refocus their corporate offering on second-tier companies.

Customers may also prove to be the ultimate enforcers when it comes to certain aspects of regulatory compliance, including the Market in Financial Instruments Directive. While the implementation deadline still stands at the beginning of next month, few sanctions are expected for non-compliance in the first couple of months.

Eventually, however, those firms that do not comply could face administrative sanctions ranging from hefty fines to suspension of trading rights, not to mention pure and simple closure.

But in the end, among increased transparency and fiercer competition, clients will be the real judges of “best execution”, with other potential sanctions: legal action or simply taking their business elsewhere. And there again, large financial institutions with a lot of money and human resources to throw at the challenge will be the best equipped to deal with higher client expectations and turn MiFID into business opportunities.